Guest blog from Tristan Fletcher, CEO at ChAI.
Career has two meanings
One relating to the sequence of jobs one takes throughout a working life and the other (courtesy of the Cambridge English dictionary) “to move fast and in a way that is out of control”. ChAI’s creation story is a combination of both.
How does one do something useful with a background in manufacturing engineering, an entry level management consulting job supporting large Fast Moving Consumer Goods (FMCG) companies, various trading and research roles in investment banking and hedge funds coupled with a parallel path as an academic in the then emerging field of Artificial Intelligence (AI)?
One founds a company that combines all of these, finally acting on one’s desire to build a business from scratch and serving a need identified over these different jobs. And that need is the lack of skills and resources that manufacturing companies have to manage the volatility of the raw material prices in their cost base.
A poor balance
At an early stage I was struck by how poor the balance is between the world of financial services and the corporations actually making the products we all buy as consumers. The well resourced hedge funds and investment banks I worked in would have teams of PhDs and access to exotic and expensive datasets to assist them gain an edge in their speculative endeavours; whilst the people making the cars, biscuits and pharmaceuticals we all buy as consumers were operating resourcefully but mostly blindly. The futures markets had been set up to transfer this raw material price risk from those end producers but were now operating mostly as a vehicle of speculation for more sophisticated operators.
Why not democratise access to what we had in the banks and hedge funds and level that playing field?
This was what was at the back of my mind when I was asked by the UK government to go on a trade mission to China to sell the UK’s AI services there. Even before going I realised how patronising a theme this would prove to be, and this was reinforced by the visit. Along with some more humility, what I did find was a state-owned organisation who was a perfect example of this need. This company made copper pipes which they sold at a fixed price and wanted assistance forecasting their cost base so that they could take action to hedge out their copper price risk should it look like it was going to rise.
They were very good at making pipes but didn’t have any insight into the main component in their cost base and were frustrated with the need to absorb the price risk in their increasingly volatile key raw material. I built a crude tool that would forecast the price of copper as traded on the Shanghai Futures exchange for them on a daily basis and sold them access to it. This was the genesis of ChAI.
ChAI was born
I came back to the UK with a keen desire to build something that replicated what I had done for this company in China and started to speak to some of the FMCG companies I’d worked with as a consultant. This reinforced how pervasive the problems around managing this aspect of corporates’ operational cost base were. I then spoke to key ex-colleagues to build out the incredibly high calibre co-founding team that a problem like this merits.
We started building an MVP for a market intelligence prototype and speaking to customers about how they were dealing with the problems of raw material price volatility in their cost bases.
It became apparent at a very early stage that simply forecasting prices for clients as a market intelligence tool was not going to be enough. Many companies would complain that even with insight into what prices might do, they did not have the organisational flexibility to act on those forecasts – for example to change how they might procure the materials. The tools that larger companies had access to to manage their price risk (e.g. financial derivatives products such as futures and options) were simply not accessible to anything other than very large corporations. And even in the larger companies, though it is possible to transfer price risk in many commodities, huge gaps exist – particularly in packaging. Although it’s trivial for a company like Mondelez to hedge out their cocoa and sugar risk in the financial markets, transferring risk for the cardboard packaging that wraps their Toblerones or the plastic that coats their Oreos is much more difficult.
The insurance product
So the concept of an insurance product that actually underwrites raw material price risk for the clients we wanted to serve with our forecasts was a necessity right from the beginning. Otherwise we would just be a company selling our clients software highlighting a problem without a solution.
This was all three years ago – before Covid and the war in Ukraine were to turn commodity price volatility and inflation from a small concern to the number one priority for many of our clients.
Our mission is to mitigate the impact that these horrendous human disasters have already had and reduce the price inflation that will inevitably get passed on to customers as we all grapple with this nascent cost of living crisis.
We’ve built the commercial and technical backbone for an insurance product and after courting Insurtech Gateway over our three year journey, have finally started collaborating with them to execute on our mission.
Where does our name come from?
All the words for “tea” worldwide fall into two groups, sounding similar to either “te” or “chai”. How these two different forms spread around the globe, reflects the history and transmission of tea drinking culture and trade: the “te” words being spread by sea and the “chai” ones by land.
Several thousand years later, at ChAI we apply Artificial Intelligence to similar trade patterns to give our clients the edge in modern commodities markets.
A note from Insurtech Gateway
“Thank you so much for sharing your story Tristan, we are excited to be supporting a venture on a mission to utilise insurance to build more resilient global supply chains. At the Gateway we are always eager to meet founders from non-insurance backgrounds – like Tristan and his Co-Founders. Experts from outside the industry have the deep domain knowledge and skills needed to fundamentally change how we assess risk. If you are an outsider with a big idea or have already founded a pre-seed or seed insurtech, we have the Insurance expertise and the tools to help you launch and scale faster. Check out our incubator and venture fund or get in touch.”